Deficit super panel is not yet at square one

The congressional supercommittee, tasked with reducing trillions of dollars from the nation’s record debt, can’t agree on how to count.

Negotiations within the 12-member panel have been slowed down by an intense debate over the basic question of how to count the savings from any potential deficit-reduction deal.

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With only weeks left before the bipartisan panel hits the congressionally mandated deadline for reporting its recommendations, lawmakers have yet to resolve the thorny question of what kind of baseline to use to score a deal, according to sources familiar with the talks.

The question is critical, because without agreement on the benchmark, it will be virtually impossible to agree on a package that could be moved to the Senate and House for final approval. The baseline will be the measure that the supercommittee will use to judge whether it has reached its mandate of at least $1.2 trillion in savings, set by the deficit deal this summer. If the panel deadlocks, deep spending cuts to defense and non-defense programs would be triggered.

“Baselines are always an issue,” said House Ways and Means Committee Chairman Dave Camp (Mich.), a Republican member of the supercommittee, who declined to comment specifically on the panel’s deliberations.

The budget baseline is an especially contentious issue for the supercommittee because it has been empowered to use whatever benchmark it wants and is under enormous pressure to avoid budget gimmicks.

Usually, the Senate and House budget committees decide the appropriate baseline for assessing the budgetary impact of a piece of legislation. Generally, the budget panels rely on Congressional Budget Office (CBO) cost projections measured against current law.

“What the law said is they can include an estimate in the legislation they report. They can do a cost estimate with any baseline they decide on,” said James Horney, vice president for Federal Fiscal Policy at the Center on Budget and Policy Priorities. “Typically the committees reporting legislation can’t decide the baseline.”

Speaker John Boehner (R-Ohio) has argued since August that the committee should use current law as its benchmark. This would preclude it from changing income tax rates because doing so would score as a huge loss of revenue unless it went so far as to wipe out all of the tax cuts enacted under then-President George W. Bush in 2001 and 2003.

“Legislation must be scored by the Congressional Budget Office, which uses a current law baseline,” Boehner’s spokesman, Michael Steel, said Tuesday. “As the Speaker has said repeatedly, tax hikes are a nonstarter, because tax hikes destroy jobs.”

A Senate Democratic leadership aide said Senate Majority Leader Harry Reid (D-Nev.) is not pushing for the panel to use current law or any other benchmark.

Tax cuts have dominated the baseline discussion, but it addresses a wide range of legislative dilemmas facing the supercommittee. For example, Medicare payments to physicians are scheduled to take a nearly 30 percent cut at the beginning of 2013. But Congress has repeatedly delayed such reductions for years, opting to kick the can down the road. Repealing the flawed reimbursement system would cost about $300 billion over 10 years.

Douglas Holtz-Eakin, a former CBO director who served as a senior adviser to Sen. John McCain’s (R-Ariz.) 2008 presidential campaign, said the supercommittee would flout precedent by using a baseline other than current law.

“I thought the default would be current law. That’s always been what CBO has scored against. For the committee to do something else would be quite dramatic,” he said.

Holtz-Eakin acknowledged the panel could direct CBO to score the legislation differently than it usually does.

Under current law, the Bush-era tax cuts are due to expire at the end of next year. If that happens, the government will reap more than $3 trillion in additional revenues over the next decade. If current law were to be used as a baseline, any changes the supercommittee makes to tax rates will be compared to the current-law scenario under which the Bush tax cuts expire.

Any attempt by the supercommittee to let the Bush tax rates expire for the wealthy would score as a significant increase in the projected deficit. Lower rates for middle-income earners make up the bulk of the cost of the Bush tax breaks, and most insiders believe Congress will extend them.

Democrats want the supercommittee to use current policy as a budget baseline, or what is known as a plausible baseline. A plausible baseline was adopted by the fiscal commission headed by former Sen. Alan Simpson (R-Wyo.) and former White House Chief of Staff Erskine Bowles (D).

A current policy baseline assumes the Bush-era tax rates for middle- and high-income earners will continue. Repealing those tax breaks for families earning over $250,000 annually while maintaining them for earners below that threshold would score as a huge influx of revenue — in the ballpark of $800 billion to $900 billion. That could take the supercommittee a long way toward cutting the deficit by $1.2 trillion.

Even if Republicans refuse to repeal the Bush-era tax rates for the wealthy, which insiders expect, a currency policy baseline would give the supercommittee incentive for rewriting income tax rates.

The panel is expected to follow the example of the Simpson-Bowles commission and consider reducing rates while eliminating hundreds of billions of dollars’ worth of tax breaks for special causes ranging from ethanol production to municipal bonds.

A current policy baseline would let the panel reduce the rates, eliminate tax expenditures and count the surplus revenue toward deficit reduction.

A current-law baseline would score the cost of lowering tax rates as a huge expense that would dwarf the benefit of eliminating tax expenditures, taking the committee no closer to its goal.

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Under the current-law baseline, the panel could focus narrowly on eliminating special tax breaks without blowing up the projected cost of the legislation but would then have to give up the carrot of lower tax rates, which Democrats hope can be used to entice Republicans to support tax reform.

Democrats are tempted to use a plausible baseline, similar to the one used by Simpson-Bowles, which would assume the expiration of Bush-era tax rates for the wealthy. According to this line of thinking, it might cajole Republicans into supporting tax reform by minimizing projected revenues from tax reform.

The Simpson-Bowles commission projected its plan would raise $1.2 trillion in new revenues, using what it deemed a plausible baseline. That revenue number was modest enough to attract the support of Republican Sens. Tom Coburn (Okla.) and Mike Crapo (Idaho). If the commission had used a current policy baseline, the additional tax revenues would have scored at more than $2 trillion, a big number that Republican members of the commission might have had trouble defending.

It’s a double-edged sword for Democrats. If they agree to adopt a plausible baseline but Republicans show no appetite for raising major sums of revenue through tax reform, the panel might have to find additional spending cuts.

If Republicans agreed to tax reform amounting to only $500 billion in new revenues, the supercommittee would have to find $300 billion to $400 billion in additional spending cuts. That’s because the modest tax reform would count as a major expense if measured against a baseline assuming tax breaks for wealthy earners will expire at the end of 2012.

“At the end of the day, what really matters is the level of revenues and level of spending we end up with, and the baseline has nothing to do with that. But when it comes to talking about how much deficit reduction you’re achieving, then the baseline you use as a starting point is crucial,” said Horney, of the Center on Budget and Policy Priorities.